This is the accessible text file for GAO report number GAO-03-1102
entitled 'Tax Administration: Information Is Not Available to Determine
Whether $5 Billion in Liberty Zone Tax Benefits Will Be Realized' which
was released on October 06, 2003.
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Report to Congressional Requesters:
United States General Accounting Office:
GAO:
September 2003:
TAX ADMINISTRATION:
Information Is Not Available to Determine Whether $5 Billion in Liberty
Zone Tax Benefits Will Be Realized:
Tax Administration:
GAO-03-1102:
GAO Highlights:
Highlights of GAO-03-1102, a report to the Honorable Charles B.
Rangel, Ranking Minority Member, Committee on Ways and Means, House of
Representatives, and the Honorable Carolyn B. Maloney, House of
Representatives
Why GAO Did This Study:
The President pledged a minimum of $20 billion in assistance to New
York for response and recovery efforts after the September 11, 2001,
terrorist attacks. This includes tax benefits, commonly referred to as
the Liberty Zone tax benefits, that the Joint Committee on Taxation
(JCT) estimated would reduce federal tax revenues by about $5 billion.
The actual amount of benefits realized, however, will depend on the
extent to which taxpayers and the city and state of New York take
advantage of them.
GAO was asked to determine
* the extent to which the Internal Revenue Service (IRS) is collecting
and reporting information about the number of taxpayers using each of
the seven Liberty Zone tax benefits and the revenue loss associated
with those benefits and
* if IRS is not collecting and reporting this information, what steps
it would need to take and what resources would be needed to do so.
GAO is making no recommendations in this report. The Commissioner of
Internal Revenue was provided a draft of this report for his review
and comment. The IRS Director of Tax Administration Coordination
agreed with the contents of the report.
What GAO Found:
For one of the seven Liberty Zone tax benefits, the business employee
credit, IRS is collecting but not planning to report some information
about use—the number of taxpayers claiming the credit and the amount
of credit claimed—nor is it planning to use this information to report
the revenue loss associated with that benefit. IRS is not planning to
collect or report information about the use of the other six benefits
or the revenue loss associated with those benefits. According to IRS
officials, the agency followed its usual procedures in determining
whether to collect information about benefit use and revenue loss. IRS
officials said they would collect and report these data if (1) it
would help the agency administer the tax laws or (2) IRS was
legislatively mandated to do so.
IRS would need to make several changes if it were to collect more
information on the use of the benefits and the associated revenue
loss, and this information would not be complete or lead to a
verifiable measure of the reduction in federal tax revenues due to the
benefits. IRS would need to change forms, processing procedures, and
computer programming, which would add to taxpayer burden and IRS’s
workload. IRS officials were unable to estimate the costs involved in
accomplishing these actions or the number of staff needed to do so.
The officials said that the earliest they could make these changes
would be for tax year 2004 returns. As a result, IRS would not have
information for two of the years that the benefits were in effect,
which is significant because most of the benefits expire by the end of
2006. In addition, if IRS were to collect data on the use of the
Liberty Zone benefits, it would be able to make an estimate, but could
not produce a verifiable measure, of the revenue loss due to the
benefits because, for example, IRS would have to make assumptions
about how taxpayers would have behaved in the absence of the
benefits.
www.gao.gov/cgi-bin/getrpt?GAO-03-1102.
To view the full product, including the scope and methodology, click
on the link above. For more information, contact Michael Brostek at
(202) 512-9110 or brostekm@gao.gov.
[End of section]
Contents:
Letter:
Results in Brief:
Background:
IRS Generally Not Planning to Collect or Report Information about the
Use of Liberty Zone Tax Benefits or Reductions in Taxpayers' Tax
Liabilities:
Several Changes Needed If IRS Were to Collect and Report More
Information about the Liberty Zone Tax Benefits and Estimate Revenue
Losses:
Agency Comments:
Appendix I: Objectives, Scope, and Methodology:
Appendix II: Summary of the Liberty Zone Tax Benefits:
Table:
Table 1: Example of Recalculation of Taxable Income:
United States General Accounting Office:
Washington, DC 20548:
September 30, 2003:
The Honorable Charles B. Rangel
Ranking Minority Member
Committee on Ways and Means
House of Representatives:
The Honorable Carolyn B. Maloney
House of Representatives:
The President pledged a minimum of $20 billion in assistance to New
York for response and recovery efforts after the terrorist attacks of
September 11, 2001. The $20 billion includes about $15 billion of
congressionally appropriated funds, primarily administered by the
Department of Housing and Urban Development, Department of
Transportation, and Federal Emergency Management Agency (FEMA), for
different types of assistance.[Footnote 1] The remaining assistance
came in the form of tax benefits, which the Joint Committee on Taxation
(JCT) estimated would reduce federal revenues by about $5 billion.
These tax benefits are commonly referred to as the Liberty Zone tax
benefits.[Footnote 2] Because of your interest in whether the $5
billion in tax benefits will be realized, you asked us to determine the
extent to which the Internal Revenue Service (IRS) is collecting and
reporting information about the number of taxpayers using each of the
seven Liberty Zone tax benefits and the revenue loss associated with
those benefits. In addition, if IRS is not collecting and reporting
this information, you asked us to determine what steps it would need to
take and what resources would be needed to do so.
To address these objectives, we interviewed IRS and city and state of
New York officials and analyzed information they provided, as well as
JCT data, about the use and revenue effects of the Liberty Zone tax
benefits. We also discussed the steps IRS would need to take to collect
information on the use and revenue effects of the benefits and the
resources it would need to do so. For the purposes of this report, we
defined use as the number of taxpayers who claimed each benefit and the
amount each claimed. However, the amount that taxpayers claim on their
returns is not the same as the reduction in tax liabilities due to
using the benefits. Because some of the Liberty Zone tax benefits
substitute for less generous deductions or credits to which taxpayers
would otherwise be entitled, the net reduction in taxpayers' tax
liabilities (and net reduction in federal revenues) can only be
determined by comparing taxpayers' tax liabilities with the benefits in
place to their tax liabilities when only the alternate deductions and
credits are available.[Footnote 3] Our scope and methodology are
discussed in greater detail in appendix I.
Results in Brief:
For one of the seven Liberty Zone tax benefits, the business employee
credit, IRS is collecting but not planning to report some information
about use--the number of taxpayers claiming the credit and the amount
of credit claimed--nor is it planning to use this information to report
on the revenue loss associated with that benefit. IRS is not planning
to collect or report information about the use of the other six
benefits or the revenue loss associated with those benefits. IRS can
collect information on the use of the business employee credit because
it developed a new form to administer this credit. However, IRS
currently cannot collect information on the remaining six Liberty Zone
benefits because it is using existing forms to administer them, and
taxpayers do not report these six benefits as separate items on their
returns. According to IRS officials, the agency followed its usual
procedures in determining whether to collect information about benefit
use and revenue loss. IRS officials said they would collect and report
these data if (1) it would help the agency administer the tax laws or
(2) IRS was legislatively mandated to do so.
IRS would need to make several changes if it were to collect more
information on the use of the benefits and the associated revenue loss,
and this information would not be complete or lead to a verifiable
measure of the reduction in federal tax revenues due to the benefits.
IRS would need to change forms, processing procedures, and computer
programming, which would add to taxpayer burden and IRS's workload. For
example, changing the form that taxpayers use to claim depreciation so
that they report separately the amount of depreciation due to the
special Liberty Zone depreciation allowance would result in increased
taxpayer burden. IRS's workload would also increase because, among
other things, it would be processing additional information on
depreciation. IRS officials were unable to estimate the costs involved
in accomplishing these actions or the number of staff needed to do so.
They said that the earliest they could make these changes would be for
tax year 2004 returns. As a result, IRS would not have information for
two of the years that the benefits were in effect, which is significant
because most of the benefits expire by the end of 2006. In addition, if
IRS were to collect data on the use of the Liberty Zone benefits, it
would be able to make an estimate, but could not produce a verifiable
measure, of the revenue loss due to the benefits because, for example,
IRS would have to make assumptions about how taxpayers would have
behaved in the absence of the benefits.
The Commissioner of Internal Revenue was provided a draft of this
report for his review and comment. The IRS Director of Tax
Administration Coordination agreed with the contents of the report.
Background:
To assist New York in recovering from the September 11, 2001, terrorist
attacks, Congress passed Public Law 107-147, the Job Creation and
Worker Assistance Act of 2002. The act was signed into law on March 9,
2002, and created seven tax benefits that focus on the New York Liberty
Zone. The Liberty Zone tax benefits include:
* treating employees in the Liberty Zone as a targeted group for
purposes of the work opportunity tax credit (WOTC), which IRS refers to
as the business employee credit;
* a special depreciation allowance;
* an increase in section 179 expensing;
* special treatment of leasehold improvement property;
* an extension of the replacement period for involuntarily converted
property;
* authority to issue tax-exempt private activity bonds; and:
* authority to issue advance refunding bonds.
An explanation of each benefit, an example of how it can be used, and
the period each benefit is in effect are included in appendix II.
Under the Congressional Budget Act of 1974 as amended, JCT provides
estimates of the revenue consequences of tax legislation. In March
2002, JCT estimated that the New York Liberty Zone tax benefits would
reduce federal revenues by $5.029 billion over the period 2002 through
2012.[Footnote 4]
IRS Generally Not Planning to Collect or Report Information about the
Use of Liberty Zone Tax Benefits or Reductions in Taxpayers' Tax
Liabilities:
For one of the seven Liberty Zone tax benefits, the business employee
credit, IRS is collecting but not planning to report some information
about use--the number of taxpayers claiming the credit and the amount
of credit claimed--nor is it planning to use this information to report
on how the benefit has reduced taxpayers' tax liabilities. IRS is not
planning to collect or report information about the use of the other
six benefits or how using these benefits has reduced taxpayers' tax
liabilities.
IRS collects information on how many taxpayers use the business
employee credit and the amount of the credit claimed on Form 8884 (New
York Liberty Zone Business Employee Credit). Submission processing
officials in the Small Business/Self-Employed (SB/SE) Division began
entering information from this form into IRS's computer system in
January 2003. Some taxpayers claiming the business employee credit may
have their returns processed by the Wage and Investment (W&I) Division,
which is not planning to enter information from the form into the
computer system. However, IRS officials said that the bulk of the
taxpayers who would claim this credit would submit their returns to the
SB/SE Division.
IRS can collect information on the use of the business employee credit
because it developed a new form to administer this credit. Although the
business employee credit was included in the WOTC provisions, IRS
officials said they needed to track business employee credits
separately because the business employee credit can be used to offset
any alternative minimum taxes owed but the general WOTC provisions
cannot.[Footnote 5] IRS currently cannot collect information on the
remaining six Liberty Zone benefits because it is using existing forms
to administer them, and taxpayers do not report these six benefits as
separate items on their returns. For example, taxpayers add the amount
of depreciation they are allowed under the Liberty Zone special
depreciation allowance benefit to other depreciation expenses and
report their total depreciation expenses on their returns. Since
taxpayers do not report their use of six of the seven benefits
separately on their returns, IRS cannot report on how extensively these
six benefits were used.
IRS officials said that although they are collecting information on the
amount of business employee credits claimed by taxpayers, they are not
planning on reporting information on the extent to which the benefit
reduced taxpayers' tax liabilities. For the other six benefits, IRS
officials said that without information about use, they cannot collect
or report on the extent to which the benefits reduced taxpayers' tax
liabilities.[Footnote 6]
According to IRS officials, the agency followed its usual procedures in
determining the type of information to collect about the Liberty Zone
tax benefits. They added that IRS would collect and report information
that would help it to administer the tax laws or if it was
legislatively mandated to collect or report information. IRS officials
said they do not need information about the use of the Liberty Zone tax
benefits or the resulting reductions in taxpayers' tax liabilities in
order to administer the tax laws. For example, IRS officials said that
they do not need information on each specific benefit claimed to
properly target their enforcement efforts. Instead, they target their
enforcement efforts based on taxpayers claiming various credits,
deductions, and so forth that fall outside of expected amounts. In
addition, IRS officials noted that the agency has not been
legislatively mandated to collect or report information on the
benefits.
Several Changes Needed If IRS Were to Collect and Report More
Information about the Liberty Zone Tax Benefits and Estimate Revenue
Losses:
IRS would need to make several changes if it were to collect more
information on taxpayers' use of the benefits and their effect on
reducing taxpayers' tax liabilities. IRS would need to change forms
used to collect information from taxpayers, change how it processes
information from tax returns, and revise computer programming, which
would add to taxpayer burden and IRS's workload. Even if it were to
make these changes, IRS would not have information for two of the years
the benefits were available. Also, although the additional information
would enable IRS to make an estimate of the revenue loss due to the
benefits, it would not be able to produce a verifiable measure of the
loss. To produce the estimate, IRS would have to make assumptions about
how taxpayers would have behaved in the absence of the benefits.
Several Changes Needed If IRS Were to Report on Use of Benefits and
Reduction in Taxpayers' Tax Liabilities:
For six of seven of the Liberty Zone tax benefits, IRS would need to
revise forms, tax return processing procedures, and computer
programming if it were to collect and report information about the
number of taxpayers claiming the benefit and the amount they claimed.
It would also need to take most of these steps to report on the use of
the seventh benefit--the business employee credit. According to IRS
officials, they would need to make staff available to revise forms,
review returns for completeness and accuracy, transcribe the additional
data, and write the necessary computer programs for entering and
extracting data. They would also need to allocate computer resources to
process the additional information collected and prepare reports on the
use of the benefits. For example, for the special depreciation
allowance benefit, IRS would need to revise:
* Form 4562 (Depreciation and Amortization) so that taxpayers reported
the amount of depreciation they claimed specifically due to this
benefit,
* tax return processing procedures so that processing staff reviewed
Form 4562 for completeness and accuracy and transcribed information
about the special depreciation allowance, and:
* computer programming so that information about the special
depreciation allowance could be entered into IRS's information systems
and extracted in order to prepare reports about the use of the benefit.
For the seventh benefit--the business employee credit--taxpayers
already separately report the amount of the credit they are claiming,
and IRS is already reviewing these forms for accuracy and completeness,
transcribing data from them, and entering this information into the
agency's computer system for those returns that are processed by the
SB/SE Division. However, computer programming would need to be changed
to extract information to prepare reports about benefit use. For any
returns processed by the W&I Division, IRS would also need to revise
W&I processing procedures and computer programming.
Since IRS currently does not have any plans to make these changes,
officials were unable to estimate the costs involved in accomplishing
these actions or the number of staff needed to do so. However, IRS
officials estimated they added one full-time equivalent (FTE) primarily
to review the Form 8884s for completeness and accuracy and for data
transcription--part of the process to collect information about the use
of the business employee credit.[Footnote 7]
If IRS collected information about the use of the benefits, IRS could
then develop some information on the reduction in taxpayers' tax
liabilities due to the benefits. For example, IRS could determine how
much lower each taxpayers' tax liability is due to the use of the tax
benefits, assuming that taxpayer behavior would be the same whether the
benefits existed or not. Table 1 is an example of such a computation
for claiming the Liberty Zone Section 179 expensing benefit. In this
example, a taxpayer with $100,000 in income bought $40,000 worth of
office equipment in 2002 and placed this equipment in service in the
Liberty Zone in 2002. After applying the Liberty Zone section 179
expensing benefit, taxable income would be $60,000. Since the equipment
has been completely expensed, the taxpayer cannot claim any further
deductions for this equipment. To recalculate the taxpayer's taxable
income as if the special Liberty Zone expensing benefit did not exist,
IRS could assume that the taxpayer would make the same investment, even
without the Liberty Zone tax benefit, and still claim the $24,000
section 179 deduction available to all taxpayers in 2002 and any other
available deductions, such as the special depreciation allowance. In
our example, the special depreciation allowance would be worth $4,800,
and the amount otherwise available as a depreciation deduction (regular
depreciation) would be worth $1,600, which would reduce the taxpayer's
taxable income to $69,600. The total reduction in taxable income would
be $9,600.
Table 1: Example of Recalculation of Taxable Income:
[See PDF for image]
Sources: IRS and GAO.
Note: GAO analysis of IRS information.
[End of table]
Once all the adjustments to taxable income were made, IRS would then
need to apply the appropriate marginal tax rate to arrive at the
taxpayer's recalculated tax liability.
IRS Could Produce Estimates but Not a Verifiable Measure of the Revenue
Loss:
If IRS were to begin collecting information on the number of taxpayers
using the Liberty Zone tax benefits and the amounts they claimed, the
information would not be complete. In addition, although the
information would enable IRS to make an estimate of the revenue loss
due to the benefits, the information would not result in a verifiable
measure of the loss. To produce the estimate, IRS would have to make
assumptions about how taxpayers would have behaved in the absence of
the benefits.
IRS said the earliest it would be able to collect information on the
number of taxpayers using the benefits and the amounts each claimed
would be for tax year 2004 returns, which IRS would not process until
calendar year 2005. As a result, IRS would not have information for two
of the years that the benefits were in effect, which is significant
because most of the benefits expire by the end of 2006.[Footnote 8] IRS
could not reconstruct information on tax liability for those 2 years
because returns already filed would not indicate whether taxpayers used
the Liberty Zone benefits and would not show the amount claimed through
benefit use. Although IRS could ask for information about past benefit
use since taxpayers are instructed to keep tax records for 3 years,
this would require taxpayers to provide additional information and
increase taxpayer burden. Also, it would be difficult for IRS to use
current year information to estimate the amount claimed through benefit
use retroactively because the pattern of using the benefits could have
changed over time.
In addition to not being complete, the data that IRS could collect on
the number of taxpayers using the Liberty Zone benefits and the amounts
each claimed would not be sufficient for actually measuring how much
revenue those benefits cost the federal government. The reduction in
revenues due to the Liberty Zone tax benefits is equal to the
difference between the amount of revenue that the federal government
would collect with the benefits in place and the amount it would
collect in the absence of those benefits. There are two reasons why
revenues would be different with and without the benefits. First, the
rules for computing tax liabilities are different in the two cases (as
shown in table 1). Second, the behavior of many taxpayers is likely to
be different in the two cases. In fact, a primary purpose of the tax
benefits is to influence taxpayer behavior. For example, in the case of
the Liberty Zone section 179 benefit, some taxpayers who claim this
benefit would have made different investment decisions if that
particular benefit were not available. In our simplified example shown
in table 1, this difference in behavior might be that the taxpayer
invested less than $40,000 in office equipment--perhaps even nothing--
because the Liberty Zone benefit did not exist. As a consequence, the
taxpayer's taxable income would have been different than the $69,600
shown in table 1. Given that IRS cannot know what taxpayers would have
done in the absence of the benefits, the best it could do is estimate
revenue losses based on assumptions about that alternative behavior.
Agency Comments:
The Commissioner of Internal Revenue was provided a draft of this
report for his review and comment. The IRS Director of Tax
Administration Coordination agreed with the contents of the report.
As agreed with your offices, unless you publicly announce its contents
earlier, we plan no further distribution of this report until 7 days
from its date. At that time, we will send copies to the Chairman and
Ranking Minority Member of the Senate Committee on Finance; the
Chairman of the House Committee on Ways and Means and the Chairman and
Ranking Minority Member of its Subcommittee on Oversight; the Secretary
of the Treasury; the Commissioner of Internal Revenue; the Director of
the Office of Management and Budget; and other interested parties. We
will make copies available to others on request. In addition, the
report will be available at no charge on the GAO Web site at http://
www.gao.gov.
This report was prepared under the direction of Jonda Van Pelt,
Assistant Director. If you have any questions regarding this report,
please contact her at (415) 904-2186 or vanpeltj@gao.gov or me at (202)
512-9110 or brostekm@gao.gov. Key contributors to this report were Evan
Gilman, Edward Nannenhorn, Lynne Schoenauer, Shellee Soliday, Anne
Stevens, and James Wozny.
Michael Brostek
Director, Tax Issues:
Signed by Michael Brostek:
[End of section]
Appendix I: Objectives, Scope, and Methodology:
Our first objective was to determine the extent to which the Internal
Revenue Service (IRS) is collecting and reporting information about the
use and value of the seven Liberty Zone tax benefits. We defined use as
the number of taxpayers who claimed each benefit and the amount each
claimed. In analyzing value, we examined what information IRS could
provide about reductions in taxpayers' tax liabilities when they used
the Liberty Zone tax benefits, and then examined whether this
information could be used to measure the actual reduction in federal
tax revenues. To address the first objective, we interviewed IRS
officials from Legal Counsel, the Wage and Investment (W&I) Division's
and the Small Business/Self-Employed (SB/SE) Division's submission
processing groups, Statistics of Income (SOI), Forms and Publications,
and the Tax Exempt Government Entities (TEGE) Division to determine if
they were collecting and reporting any information about the use of the
Liberty Zone tax benefits and how the benefits reduced taxpayers' tax
liabilities. We analyzed the documents they provided about collecting
and reporting on the use of the benefits and the reduction in
taxpayers' tax liabilities. We also analyzed the data the Joint
Committee on Taxation (JCT) provided about its estimate of the
reduction in federal tax revenues. Finally, we interviewed New York
city and state officials to determine if they were collecting and
reporting information on the benefits.
Our second objective was to determine what steps IRS would need to take
and the resources it would need to collect and report information on
the use and value of the Liberty Zone tax benefits if it is not already
doing so. We used the same definition of use and value as we used for
the first objective. To address the second objective, we interviewed
IRS officials from Legal Counsel, the W&I Division's and the SB/SE
Division's submission processing groups, SOI, Forms and Publications,
and the TEGE Division to determine what steps they would need to take
and the resources they would need to collect and report information on
the use of the Liberty Zone tax benefits and the reduction in
taxpayers' tax liabilities if they used the benefits. We also analyzed
IRS documents related to the steps that would need to be taken to
collect and report on the use of the benefits and on the reduction in
taxpayers' tax liabilities.
We performed our work from April 2003 through August 2003 in accordance
with generally accepted government auditing standards.
[End of section]
Appendix II: Summary of the Liberty Zone Tax Benefits:
Liberty Zone tax benefit[A]: Business employee credit; Benefit summary:
The work opportunity tax credit (WOTC) was expanded to include a new
targeted group for employees who perform substantially all their
services for a business in the Liberty Zone or for a business that
relocated from the Liberty Zone elsewhere within New York City due to
the physical destruction or damage of their workplaces by the September
11, 2001, terrorist attacks; The New York Liberty Zone business
employee credit allows eligible businesses with an average of 200 or
fewer employees to take a maximum credit of 40 percent of the first
$6,000 in wages paid or incurred for work performed by each qualified
employee during calendar years 2002 and 2003. Unlike the other targeted
groups under WOTC, the credit for the new group is available for wages
paid to both new hires and existing employees; Example of the benefit:
An employee works at a small company located in the Liberty Zone from
June 1, 2002, to October 31, 2002, and receives $3,000 in wages a
month. The company can claim a credit for 40 percent of the first
$6,000 in wages paid ($2,400); Effective dates: Wages paid or incurred
for qualified employees during calendar years 2002 and 2003.
Liberty Zone tax benefit[A]: Special depreciation allowance; Benefit
summary: The special depreciation allowance provides an additional
deduction for eligible properties. Eligible Liberty Zone properties
include new tangible property (e.g., new office equipment), used
tangible property (e.g., used office equipment), and residential rental
property (e.g., an apartment complex) and nonresidential real property
(e.g., an office building) if it rehabilitates real property damaged or
replaces real property destroyed or condemned as a result of the
September 11, 2001, terrorist attacks; For property inside the Liberty
Zone, the special depreciation allowance allows taxpayers to deduct 30
percent of the adjusted basis of qualified property acquired by
purchase after September 10, 2001, and placed in service on or before
December 31, 2006 (December 31, 2009, in the case of nonresidential
real property and residential rental property). For property outside
the Liberty Zone, a special depreciation allowance is available for
taxpayers but only with regard to qualified property--such as new
tangible property and non-Liberty Zone leasehold improvement property-
-that is acquired after September 10, 2001, and before September 11,
2004, and is placed in service on or before December 31, 2004. However,
recent legislation (the Jobs and Growth Tax Relief Reconciliation Act
of 2003, Pub. L. No. 108-27) has increased the deduction to 50 percent
for qualified property both within and outside the Liberty Zone that is
acquired after May 5, 2003, and placed in service on or before December
31, 2004; Example of the benefit: On December 1, 2002, a real estate
development firm purchases an office building in the New York Liberty
Zone that costs $10 million and places it in service on June 1, 2003.
The building replaces real property damaged as a result of the
September 11, 2001, terrorist attacks. Under the provision, the
taxpayer is allowed an additional first-year depreciation deduction of
30 percent ($3 million); Effective dates: Residential rental property
and nonresidential real property: Acquired by purchase after September
10, 2001, and placed in service on or before December 31, 2009; New and
used tangible property: Acquired by purchase after September 10, 2001,
and placed in service on or before December 31, 2006.
Liberty Zone tax benefit[A]: Section 179 expensing; Benefit summary:
Taxpayers with a sufficiently small investment in qualified section 179
business property in the Liberty Zone can elect to deduct rather than
capitalize the amount of their investment and are eligible for an
increased amount over other taxpayers. For qualified Liberty Zone
property placed in service during 2001 and 2002, under section 179
taxpayers could deduct up to $59,000 ($24,000 under the general
provision plus an additional $35,000) of the cost. The investment limit
(phase-out range) in the property was $200,000. For qualified Liberty
Zone property placed in service after 2002 and before 2007, taxpayers
could deduct $60,000 ($25,000 under the general provision plus the
additional $35,000) of the cost; However, recent legislation (Pub. L.
No. 108-27) has further increased the maximum deduction for qualified
Liberty Zone property placed in service after 2002 and before 2006 to
$135,000 and has increased the investment limit to $400,000. For 2006,
the maximum section 179 deduction allowed for qualified Liberty Zone
property returns to $60,000 and the investment limit is $200,000. To
calculate the available expensing treatment deduction amount for
qualified Liberty Zone property, every dollar for which 50 percent of
the cost of the property exceeds the investment limit is subtracted
from the maximum deduction allowed; Taxpayers outside of the Liberty
Zone may also expense qualified property under section 179. However,
the maximum deduction for non-Liberty Zone property is $35,000 less
than the maximum deduction allowed for Liberty Zone property. The
investment limits for Liberty Zone and non-Liberty Zone property are
similar. However, in contrast, in calculating the available expensing
treatment deduction amount for non-Liberty Zone properties, every
dollar invested in the property that exceeds the investment limit is
subtracted from the maximum deduction allowed; Example of the benefit:
In 2002, a taxpayer purchases and places in service in his or her
Liberty Zone business several qualified items of equipment costing a
total of $260,000. Because 50 percent of the cost of the property
($130,000) is less than $200,000, the investment limit, the section 179
deduction of $59,000 is not reduced, and the taxpayer can deduct this
amount; Effective dates: Effective for section 179 property placed in
service after September 10, 2001, and on or before December 31, 2006.
Liberty Zone tax benefit[A]: Leasehold improvement property; Benefit
summary: Qualified Liberty Zone leasehold improvement property can be
depreciated over a 5-year period using the straight-line method of
depreciation. The term "qualified Liberty Zone leasehold property"
means property as defined in section 168(k)(3) and may include items
such as additional walls and plumbing and electrical improvements made
to an interior portion of a building that is nonresidential real
property. Qualified Liberty Zone leasehold improvements must be placed
in service in a nonresidential building that is located in the Liberty
Zone after September 10, 2001, and on or before December 31, 2006. The
class life for qualified New York Liberty Zone leasehold improvement
property is 9 years for purposes of the alternative depreciation
system; Taxpayers can also depreciate leasehold improvements outside
of the Liberty Zone. These taxpayers can depreciate an addition or
improvement to leased nonresidential real property using the straight-
line method of depreciation over 39 years. Qualified leasehold
improvement properties outside the Liberty Zone can qualify for both
the 39-year depreciation deduction and the special depreciation
allowance. However, leasehold improvements inside the Liberty Zone do
not qualify for the special depreciation allowance; Example of the
benefit: In 2004, a taxpayer buys and places in service $100,000 in
additional walls for a leased office building in the Liberty Zone. For
each tax year from 2004 through 2008, the taxpayer can deduct up to
one-fifth of the cost of the property; Effective dates: Effective for
property placed in service after September 10, 2001, and on or before
December 31, 2006.
Liberty Zone tax benefit[A]: Replacement period for involuntarily
converted property; Benefit summary: A taxpayer may elect not to
recognize gain with respect to property that is involuntarily converted
if the taxpayer acquires qualified replacement property within an
applicable period. The replacement period for property that was
involuntarily converted in the Liberty Zone as a result of the
September 11, 2001, terrorist attacks is 5 years after the end of the
taxable year in which a gain is realized provided that substantially
all of the use of the replacement property is in New York City. The
involuntarily converted Liberty Zone property can be replaced with any
tangible property held for productive use in a trade or business
because taxpayers in presidentially declared disaster areas such as the
Liberty Zone can use any tangible, productive use property to replace
property that was involuntarily converted; Outside of the Liberty
Zone, the replacement period for involuntarily converted property is 2
years (3 years if the converted property is real property held for the
productive use in a trade or business or for investment), and the
converted property must be replaced with replacement property that is
similar in service or use; Example of the benefit: A taxpayer held a
truck for productive use in a Liberty Zone business, but it was
destroyed in the September 11, 2001, terrorist attacks. Several years
ago, the taxpayer paid $50,000 for the truck and, over time,
depreciated the basis in the truck to $30,000. If the insurance company
paid $35,000 in reimbursement for the truck and the taxpayer used the
$35,000 to purchase replacement property of any type that is held for
productive use in a trade or business within 5 years after the close of
the tax year of payment by the insurance company, the taxpayer would
not recognize a gain; Effective dates: Effective for involuntary
conversions in the Liberty Zone occurring on or after September 11,
2001, as a result of the terrorist attacks on that date.
Liberty Zone tax benefit[A]: Private activity bonds; Benefit summary:
An aggregate of $8 billion of tax-exempt private activity bonds, called
qualified New York Liberty bonds, are authorized to finance the
acquisition, construction, reconstruction, and renovation of certain
property that is primarily located in the Liberty Zone. Qualified New
York Liberty bonds must finance nonresidential real property,
residential rental property, or public utility property and must also
satisfy certain other requirements. The Mayor of New York City and the
Governor of New York State may each designate up to $4 billion in
qualified New York Liberty bonds; Example of the benefit: The Mayor of
New York City designates $120 million of qualified New York Liberty
bonds to finance the construction of an office building in the Liberty
Zone; Effective dates: Effective for bonds issued after March 9, 2002
(the date of enactment of the Job Creation and Worker Assistance Act of
2002), and on or before December 31, 2004.
Liberty Zone tax benefit[A]: Advance refunding bonds; Benefit summary:
An aggregate of $9 billion of advance refunding bonds may be issued to
pay principal, interest, or redemption price on certain prior issues of
bonds issued for facilities located in New York City (and certain water
facilities located outside of New York City). Under this benefit,
certain qualified bonds, which were outstanding on September 11, 2001,
and had exhausted existing advance refunding authority before September
12, 2001, are eligible for one additional advance refunding. The Mayor
of New York City and the Governor of New York State may each designate
up to $4.5 billion in advance refunding bonds; Example of the benefit:
The Governor of New York State designates $70 million of advance
refunding bonds to refinance bonds that financed the construction of
hospital facilities in New York City; Effective dates: Effective for
advance refunding bonds issued after March 9, 2002, and on or before
December 31, 2004.
Sources: Public Law 107-147, IRS, and GAO.
[A] The Liberty Zone tax benefits were enacted as part of the Job
Creation and Worker Assistance Act of 2002, Pub. L. No. 107-147.
[End of table]
FOOTNOTES
[1] In March 2003, FEMA became a part of the Department of Homeland
Security. Also, a small portion of the funds are administered by other
agencies such as the Small Business Administration and the Department
of Labor. We will report additional information about the total
benefits provided to New York later this year.
[2] The New York Liberty Zone is the area located on or south of Canal
Street, East Broadway (east of its intersection with Canal Street), or
Grand Street (east of its intersection with East Broadway) in the
Borough of Manhattan in the city of New York.
[3] JCT's $5 billion estimate of the reduction in federal tax revenues
is not exactly the same as the economic value of the benefits to
taxpayers. For example, the JCT estimate, which covers a 10-year time
frame, does not completely reflect the fact that taxpayers who claim
the expensing deduction today would receive smaller deductions in the
future than they otherwise could have claimed.
[4] Joint Committee on Taxation, Estimated Revenue Effects of the "Job
Creation and Worker Assistance Act of 2002" Fiscal Years 2002-2012
(Washington, D.C.: Mar. 6, 2002), 2.
[5] The alternative minimum tax is a separate tax computation required
of some taxpayers whose taxable incomes exceed certain thresholds and
who otherwise would owe little or no taxes because they are claiming
certain special deductions and credits.
[6] Bond issuers also receive economic benefits from tax-exempt bonds
because they pay less interest than they would have had to pay on the
same amount of bonds that were not tax exempt. IRS could use forms
prepared by bond issuers to collect information about the two Liberty
Zone bond benefits, such as the maturity date and issue prices.
Information on the bonds issued is also available from the city and
state of New York.
[7] An FTE consists of one or more employees who collectively work for
1 year. For example, one full-time employee or two half-time employees
equal one FTE.
[8] Details on the expiration dates for each benefit are given in app.
II.
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